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The Not-So-Simple Truths About ETF Vs. Mutual Fund Performance

edited April 29 in Fund Discussions
Tom Madell article:
-Vanguard index mutual funds and comparable Vanguard ETFs are merely different classes of the exact same fund. Their returns are virtually identical while they have had no capital gain distributions over the last five years. Therefore, there is no particular performance superiority of one over the other.

-An ETF will not always outperform a nearly matched mutual fund. Some ETFs can still sport higher expense ratios than comparable mutual funds. And managed, as opposed to indexed mutual funds, can tilt their portfolios as to sometimes achieve a better return than an ETF which adheres strictly to its benchmark index.

-Mutual funds with a load are typically, but not always, going to show lower fee-adjusted long-term performance than a comparable ETF or mutual fund without a load, although that difference can disappear the longer the mutual fund is held.

-Nowadays, many mutual funds have very low expense ratios, especially non-managed funds.

-Be leery of performance tables that do not take into account a load's effect on performance.

-When comparing an ETF with a mutual fund, investors should look beyond just the conventional fund vs. ETF label. Some apparently similar investment vehicles, even passively managed funds, may have important differences from each other which might favor one investing in a mutual fund, or vice versa.



  • Well stated, except for the assertion that "mutual funds with a load are ... not always going to show lower fee-adjusted long term performance than a comparable ETF or mutual fund without a load [and any load fund underperformance] can disappear the longer the mutual fund is held.

    If one replaces "comparable" with "identical except for load", aka "all else being equal", then the long term performance (including effect of the load) must be lower for the load shares, and this difference does not disappear over time.

    The first assertion, that loaded funds could perform better over the long term even accounting for load is just the usual handwaving that fund A might do better than fund B even though fund A costs more. Sure, but not likely, especially if one assume "all else is equal."

    The second assertion that the underperformance of loaded funds gradually diminishes over time is a misrepresentation of arithmetic. If you buy a fund with a 5% load, then, all else being equal, it will underperform a comparable fund by 5% over the first year, but just 1%/year over five years. It's not that it is catching up, it's just that you're amortizing the underperformance over more years. After 5 years, you've still got 5% less money with the load fund; after 10 years you've still got 5% less, and so on.
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